Discover 2015 Annual Report Download - page 37

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The FDIA also prohibits any depository institution from making any capital distributions (including payment of a
dividend) or paying any management fee to its parent holding company if the depository institution would thereafter be
"undercapitalized." "Undercapitalized" institutions are subject to growth limitations and are required to submit a capital
restoration plan. For a capital restoration plan to be acceptable, among other things, the depository institution's parent
holding company must guarantee that the institution will comply with the capital restoration plan.
If a depository institution fails to submit an acceptable capital restoration plan, it is treated as if it is "significantly
undercapitalized." "Significantly undercapitalized" depository institutions may be subject to a number of requirements
and restrictions, including orders to sell sufficient voting stock to become "adequately capitalized," requirements to
reduce total assets, and cessation of receipt of deposits from correspondent banks. "Critically undercapitalized"
institutions are subject to the appointment of a receiver or conservator.
Each of our banking subsidiaries may also be held liable by the FDIC for any loss incurred, or reasonably
expected to be incurred, due to the default of the other U.S. banking subsidiary and for any assistance provided by the
FDIC to the other U.S. banking subsidiary that is in danger of default.
The FDIA prohibits insured banks from accepting brokered deposits or offering interest rates on any deposits
significantly higher than the prevailing rate in the bank's normal market area or nationally (depending upon where the
deposits are solicited), unless it is "well-capitalized," or it is "adequately capitalized" and receives a waiver from the
FDIC. A bank that is less than "well capitalized" is generally prohibited from paying an interest rate on deposits in
excess of 75 basis points over the national market average. There are no such restrictions under the FDIA on a bank
that is "well-capitalized." As of December 31, 2015, Discover Bank and Bank of New Castle each met the FDIC's
definition of a "well-capitalized" institution for purposes of accepting brokered deposits. An inability to accept brokered
deposits in the future could materially adversely impact our funding costs and liquidity. For more information, see “Risk
Factors — Credit, Market and Liquidity Risk — An inability to accept or maintain deposits in the future could materially
adversely affect our liquidity position and our ability to fund our business.”
The FDIA also affords FDIC insured depository institutions, such as Discover Bank and Bank of New Castle, the
ability to "export" interest rates permitted under the laws of the state where the bank is located. Discover Bank and
Bank of New Castle are both located in Delaware and, therefore, charge interest on loans to out-of-state borrowers at
rates permitted under Delaware law, regardless of the usury limitations imposed by the state laws of the borrower's
residence. Delaware law does not limit the amount of interest that may be charged on loans of the type offered by
Discover Bank or Bank of New Castle. This flexibility facilitates the current nationwide lending activities of Discover
Bank and Bank of New Castle.
The FDIA subjects Discover Bank to deposit insurance assessments. Under the Dodd-Frank Act, in order to bolster
the reserves of the Deposit Insurance Fund, the minimum reserve ratio set by the FDIC was increased to 1.35%. The
FDIC set a reserve ratio of 2%, 65 basis points above the statutory minimum. The FDIC also amended its deposit
insurance regulations with two changes. First, the FDIC implemented a provision of the Dodd-Frank Act that changed
the assessment base for deposit insurance premiums from one based on domestic deposits to one based on average
consolidated total assets minus average tangible equity. Second, the FDIC revised the risk-based assessment system for
all large insured depository institutions (generally, institutions with at least $10 billion in total assets, including Discover
Bank) to one based on a scorecard method. Further increases may occur in the future. The Dodd-Frank Act removed the
statutory cap for the reserve ratio, leaving the FDIC free to set a cap in the future.
Acquisitions and Investments
Since we are a bank holding company, and Discover Bank and Bank of New Castle are insured depository
institutions, we are subject to banking laws and regulations that limit the types of acquisitions and investments that we
can make. In addition, certain permitted acquisitions and investments that we seek to make are subject to the prior
review and approval of our banking regulators, including the Federal Reserve and FDIC. Our banking regulators have
broad discretion on whether to approve proposed acquisitions and investments. In deciding whether to approve a
proposed acquisition, federal bank regulators will consider, among other factors, the effect of the acquisition on
competition, our financial condition, and our future prospects, including current and projected capital ratios and levels;
the competence, experience, and integrity of our management and our record of compliance with laws and regulations;
the convenience and needs of the communities to be served, including our record of compliance under the Community
Reinvestment Act; and our effectiveness in combating money laundering. Therefore, results of supervisory activities of
the banking regulators, including examination results and ratings, can impact whether regulators approve proposed
acquisitions and investments. Supervisory actions related to anti-money laundering and related laws and regulations will